The Financial Conduct Authority (FCA) has been forced to partly suspend its £9.1bn car finance compensation scheme after a court order, delaying payouts for millions of motorists who were overcharged on loans due to commission payments between lenders and car dealers between 2007 and 2024.
Court orders suspension until challenges are heard
The court ruling requires the regulator to halt parts of the compensation scheme until a hearing scheduled for December or February next year. During that hearing, the court will decide on challenges brought by three lenders—Volkswagen Financial Services, Mercedes-Benz Financial Services, and Crédit Agricole Auto Finance—along with the consumer group Consumer Voice. A judgment is expected in the months following the hearing, according to the FCA.
This suspension means that some of Britain's largest lenders, which have already set aside billions of pounds to cover potential claims, will not need to calculate or pay compensation until the legal process concludes.
Potential outcomes if scheme is overturned
The FCA stated that if the court overturns the scheme, it may instead require lenders to resolve complaints individually under the usual complaints process. Under that process, lenders would need to respond within eight weeks, and consumers could escalate unresolved complaints to the Financial Ombudsman Service. The regulator said: “We want to secure fair compensation for consumers as quickly as possible. So, if the scheme is overturned, we may instead tell lenders to resolve complaints individually under the usual complaints process.”
FCA chief executive Nikhil Rathi told MPs on the Treasury committee last month that if the scheme were struck down, it could cost lenders an additional £6bn and take three years to resolve claims through a complaints-led approach.
Details of the compensation scheme
The FCA initially introduced the scheme in March to compensate motorists who were treated unfairly due to discretionary commission arrangements. The watchdog estimated that payouts could total £7.5bn, covering about 12.1m car loans, with an additional £1.6bn in costs. The scheme was expected to begin paying out an average of £830 per claimant this year, with most of the remaining claims resolved by 2027.
However, if the FCA is required to seek views on a revised scheme—which could also face further legal challenges—compensation could be delayed “until 2028 or beyond,” the regulator warned.
Impact on the FCA and lenders
The FCA also told the Treasury committee in June that it would take a near-£3m hit from being dragged through the courts. Deputy chief executive Sarah Pritchard said this could result in financial trade-offs, with the watchdog—funded by the companies it supervises—having to “pivot resources” internally.
Mis-sold car finance has been described as the worst consumer finance scandal since PPI. Millions of people were affected by discretionary commissions that inflated the cost of car financing. The practice, which was banned in 2021, allowed car dealers to claim higher commissions if they placed customers on loans with higher interest rates for the lender.
